A Return To Form

On the afternoon of Oct. 31, 2006, the S&P/Toronto Stock Exchange Composite Income Trust Index (SPRTCM) closed at 164.86. In the ensuing two weeks, it gave up 17.8 percent of its value, bottoming at 135.51 on Nov. 14, 2006.

Many funny things have happened since Halloween 2006, but for our purposes, there’s no greater source of ironic glee than the diverging fortunes of the income trust sector and the minority prime minister who tried to kill it. As measured by the SPRTCM, income trusts have surged more than 17 percent to within a good trading week of the October 31 mark.

Prime Minister Stephen Harper and his hatchet man, Finance Minister Jim Flaherty, are left dreaming of majority control, issuing counterproductive political gamesmanship playbooks and toying with parliamentary tricks to prevent implementation of legislative measures backed by not just the House of Commons but average Canadians as well.

It could be that Canada has drifted into a period of permanent minority governance, where no single party can muster more than 50 percent of the 308 seats in the House of Commons. Party-hopping, issue-shopping voters may now be resistant to lifelong partisan identification.

If such is the case, that fuzzy commodity called leadership will be of even-greater importance. Perhaps Harper will debrief California Gov. Arnold Schwarzenegger on how he evolved in the wake of the spectacular defeat of his 2005 ballot initiatives. Schwarzenegger rebounded with voters by charting a moderate path and talking about issues such as the environment, education and public works–and won re-election by a resounding margin.

He came to be seen as a problem solver and not a partisan–after he hired a Democratic chief of staff and built bridges to California’s Democrat-controlled legislature.         

Prorogue Elephant

It’s been a nasty political season north of the border, “a parliamentary sandbox of mindless mudslinging,” according to Greg Weston of the Edmonton Sun. The three federal parties out of power, looking to capitalize on the weaknesses of a long-in-the-tooth minority government, have ganged up to chip away at Conservative legislative proposals, behaving, in the words of government whip Jay Hill, as “a coalition government cooking up deals behind closed doors.”

Hill and the Tories responded with an aggressive playbook. Don Martin, political columnist for the National Post, came into a copy and described it as follows:

A secret guidebook that details how to unleash chaos while chairing parliamentary committees has been given to select Tory MPs.

Running some 200 pages including background material, the document – given only to Conservative chairmen – tells them how to favour government agendas, select party-friendly witnesses, coach favourable testimony, set in motion debate-obstructing delays and, if necessary, storm out of meetings to grind parliamentary business to a halt.

Martin’s May 17 column revealing the Tories’ game plan led to a May 28 clear-the-air session in advance of Parliament’s final push into a scheduled summer recess. But there’s little hope any of the four federal parties will abandon the turf it’s staked out.

Harper seemed to be cruising toward a galvanizing late-spring election, but perceived failures on environmental policy, Afghanistan and the 2007 federal budget have left him with little hope of winning a majority any time soon. And he may be gearing up to reset the game.

Members of Parliament returned to Ottawa Monday for the final stretch before the summer recess amid rising speculation the Conservatives will “prorogue” Parliament early.

“Prorogation” is the “abrupt end to a parliamentary session and all parliamentary business, brought about through the recommendation of the prime minister and proclaimed by the governor general.”

The principal effect of ending a session by prorogation is to terminate business. Members are released from their parliamentary duties until Parliament is next summoned. Parliament is still constituted. (All members remain as members, and a general election isn’t necessary.) But all orders of the body (bills, motions, etc.) are expunged.

All unfinished business is dropped, and all committees lose their power to transact business, providing a fresh start for the next session. No committee can sit during a prorogation. Bills that haven’t received Royal Assent before prorogation are “entirely terminated” and, in order to be proceeded with in the new session, must be reintroduced as if they’d never existed.

The Tories want to quickly pass the budget bill and then cut the parliamentary session short before the Liberal-controlled Senate can ratify Liberal MP Pablo Rodriguez’s private member’s bill implementing the Kyoto Protocol. 

The government doesn’t need any support from the opposition parties and can simply prorogue the House before the parliamentary calendar expires. 

But once you prorogue Parliament, it’s not as easy to start it up again as it is after a normal recess. Harper couldn’t just call Parliament back on one day’s notice. He would have to have a throne speech, the official opening of Parliament and the throne speech debate before it can get to whatever emergency debate might come up.

Privateers

McKinsey & Co released a study Monday that said private-equity deals in Canada, as in the US, are picking up and that large publicly listed companies will soon pop up on the radar screens of potential acquirers.

Three private equity consortia are reportedly considering a buyout of BCE, Canada’s largest telecom. According the McKinsey report, Canada’s private equity industry had, as of the end of 2006, CD65.5 billion (USD60.7 billion) of private capital under management. The number of Canadian buyouts has increased from 43 to 53 since 2003. McKinsey expects US private-equity firms to target midsized Canadian companies–primarily infrastructure businesses, including shipping, ports and utilities.

The report also noted the likely emergence of a “vibrant,” high-yield market in Canada as investment banks and hedge funds provide more debt financing and the Canadian income trust market shrinks.

Speaking Gigs

I’d like to extend an invitation to you and a guest to join me at this year’s San Francisco Money Show, July 26-28, 2007, at the San Francisco Marriott located in the heart of downtown San Francisco. This three-day event will be filled with opportunities for you to gain profitable insights and tools that will ignite your portfolio and boost your investment savvy. Experts on real estate, commodities, stocks, options and more will be on hand to share ideas and help you formulate strategies to reach optimum profits.

You and a guest will receive complimentary admission when you mention my name and priority code #007394. Call 800-970-4355 or visit the Money Show San Francisco Web site to register today.

I hope to see you in San Francisco.

The Roundup

Versacold Income Fund (ICE.UN, VCLDF) is the latest income trust to go private. Eimskip Holdings, an Iceland-based shipping and storage company, agreed to buy Versacold for CD12.25 a unit (CD515 million), a 16 percent premium to Versacold’s May 9 closing price. The fund had announced on that date a strategic review after it received several unsolicited offers.

This is Eimskip’s second acquisition of a Canada-based cold-storage operator since October. The purchase of Atlas Cold Storage Income Trust in October for CD583 million added 53 warehouses in North America to Eimskip’s network; Versacold’s 72 refrigerated warehouses in Argentina, Australia, Canada, New Zealand and the US will help Eimskip build its global network of temperature-controlled transportation services and storage units. Eimskip will control more than 50 percent of the Canadian cold-storage market.

The transaction is valued at close to CD1.1 billion, including debt, Versacold CEO Brent Sugden said today on a conference call.

Oil and Gas

Advantage Energy Income Fund (AVN.UN, NYSE: AAV) reported a 64 percent production volume increase to 29,012 barrels of oil equivalent per day (BOE/d) compared to 17,721 BOE/d in the first quarter of 2006. But falling natural gas prices led to a 98 percent drop in net income.

Advantage earned CD341,000, down from CD15.9 million in the year-ago period. The production increase reflects success in Advantage’s drilling program as well as the Ketch Resources acquisition, which closed June 23, 2006.

The first quarter payout ratio declined to 76 percent from 95 percent in 2006 after the trust cut its distribution and realized better gas pricing because of its hedging program. Funds from operations (FFO) for the first quarter of 2007 were CD65.6 (59 cents Canadian per unit), compared to CD46.6 million (79 cents Canadian per unit) a year ago.

Advantage has reduced its debt-to-cash flow ratio to 1.35 times from 1.64. The fund drilled 39 gross (24.1 net) wells at a 97 percent success rate. Hold Advantage Energy Income Fund.

Avenir Diversified Income Trust (AVF.UN, AVNDF) reported net income from continuing operations for the first quarter was CD7.3 million, up 3 percent from CD7.1 million in the quarter ended March 31, 2006. Net income for the quarter was CD7.3 million, down 27 percent from the CD10.1 million net income for the quarter ended March 31, 2006, because of the impact of the Essential Energy Services Trust (ESN.UN, EEYUF) spinout in the second quarter of 2006.

Funds from continuing operations were CD17.7 million for the first quarter, up 30 percent from CD13.6 a year ago on a larger contribution from the trust’s financial services division. FFO were CD17.7 million, down 14 percent from CD20.6 million, again because of the Essential deal.

Avenir declared distributions of CD10.4 million (25 cents Canadian per unit) for the quarter, down 29 percent from CD14.7 million (37 cents Canadian per unit), also because of the spinoff. If Avenir unitholders retained their units of Essential Energy Services Trust, there would be a slight increase in distributions per unit.

The 2007 quarter-end payout ratio was 59 percent of FFO. Avenir Diversified Income Trust is a hold.

Baytex Energy Trust (BTE.UN, NYSE: BTE) generated cash flow of CD59.7 million (74 cents Canadian per unit) and net income of CD23.8 million in the quarter despite unexpected weakness and volatility in oil prices. First quarter profits fell from CD28.9 million last year as oil and natural gas sales dropped.

Baytex earned 32 cents Canadian per unit for the three months ended March 31, down from 41 cents Canadian for the same period last year. Oil and gas revenues dropped to CD129.8 million from CD136.2 million. The trust maintained monthly distributions at 18 cents Canadian per unit and a net payout ratio of 57 percent.

Baytex completed a significant winter drilling program, resulting in nine successful producing wells and four stratigraphic tests that have further extended the prospective area for primary development. Buy Baytex Energy Trust up to USD20.

Pipeline Trusts

Westshore Terminals Income Fund (WTE.UN, WTSHF) generated first quarter revenue of CD36.6 million, down 5 percent from the first quarter of 2006. Westshore reported net earnings of CD12.9 million (17.5 cents Canadian per unit), down from CD16.4 million (23.4 cents Canadian per unit) a year earlier. The trust declared 26 cents Canadian per unit in distributions, down from 29 cents Canadian per unit during the first quarter of 2006.

Weighted average coal prices for 2007 expected to be USD96 per ton, down from USD113 per ton in 2006. Westshore’s throughput charges for about half the coal it handles are calculated by reference to coal prices.

Elk Valley Coal Partnership, Westshore’s primary customer, realized prices for the 2006-07 coal year that were down significantly from the 2005-06 coal year. For the 2007-08 coal year, publicly available reference prices are about 15 percent off 2006-07 prices. Westshore Terminals Income Fund is a buy up to USD11.
 
Real Estate Trusts

Dundee REIT (D.UN, DUNTF) generated FFO of CD31.8 million during the first quarter, up 65 percent over the first quarter of 2006. FFO per unit were up 6 percent to 71 cents Canadian. Revenue from rental properties increased 38 percent to CD87.2 million, while net operating income surged 48 percent to CD50 million.

Dundee’s occupancy rate hit 97 percent. The REIT distributed 55 cents Canadian per unit during the three-month period ended March 31, 2007, consistent with the fourth quarter of 2006 as well as the comparable period a year ago.

Dundee acquired CD297.5 million of rental properties funded by CD263.8 million in cash and CD29.2 million in assumed debt. The acquired properties have an average occupancy rate of 97 percent, an average remaining lease term of 4.1 years and a going in capitalization rate of 6.8 percent.

Four of the properties are located in Calgary, providing Dundee with further presence in the strong Alberta market. Dundee REIT is a buy up to USD32.

Primaris Retail REIT (PMZ.UN, PMZFF) reported first quarter FFO of CD20.2 million (34.5 cents Canadian per unit), up from CD17.4 million (34.1 cents Canadian per unit) in the first quarter of 2007. Net operating income was up 14.3 percent to CD30.6 million from CD26.7 million; distributable income came in at CD18.4 million (31.4 cents Canadian per unit) compared to CD16.4 million (32 cents Canadian per unit) a year ago.

The net operating income boost was driven by acquisitions and improved results from assets owned during both periods. The REIT renewed or leased 137,132 square feet of space during the first quarter. The weighted average new rent in these leases, on a cash basis, represented an 11.7 percent increase over the previous rent paid.

Overall occupancy was 97.1 percent at March 31, 2007, compared to 94.8 percent at March 31, 2006, and 97 percent at Dec. 31, 2006. Buy Primaris Retail REIT up to USD19.

Natural Resource Trusts

Acadian Timber Income Fund (ADN.UN, ATBUF) generated net sales of CD26.9 million on a consolidated log sales volume of 482,600 cubic meters during the first quarter of 2007. Consolidated log volumes in the first quarter of 2006 were 341,000 cubic meters, resulting in net sales of CD19.4 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) of CD9.6 million for the first quarter was CD2.7 million, or 39 percent, greater than the prior year’s first quarter, resulting in an EBITDA margin of 36 percent which is consistent with the first quarter of 2006. The first quarter typically generates approximately 45 percent of annual sales and cash flow, and the results for the first quarter of 2007 were slightly above expectations. Acadian Timber Income Fund is a buy up to USD11.

Labrador Iron Ore Royalty Income Fund (LIF.UN, LBRYF) reported royalty income for the first quarter of 2007 of CD12.9 million, down 8 percent from CD14.1 million during the first quarter of 2006. Cash flow from operating activities was CD8.7 million (27 cents Canadian per unit), compared to CD9.4 million (29 cents Canadian per unit) a year ago.

Net income was CD10.7 million (34 cents Canadian per unit), down from CD11.9 million (37 cents Canadian per unit) for the same period in 2006. Negotiations for new labor agreements to replace the Iron Ore Company of Canada (IOC) agreements, which expired on Feb. 28, 2007, broke down; a strike commenced on March 9, 2007, closing down IOC’s production facilities. A new five-year agreement was ratified on April 25, 2007, and production has resumed, with a ramp up to normal production expected in early May.

Sales have continued to be made from stockpiles, but the loss of production during the strike will negatively affect second quarter sales. The timing of cargo shipments led to reduced sales compared to the 2006 first quarter. Prices for 2007 were settled during the quarter with increases of 5.8 percent for pellets and 10.4 percent for concentrates retroactive to January 1 for most contracts. Hold Labrador Iron Ore Royalty Income Fund.

Noranda Income Fund (NIF.UN, NNDIF) reported net earnings of CD16.4 million for the first quarter of 2007, compared to CD4.3 million in the same quarter a year ago. The increase in net earnings was due to significantly higher premiums, higher processing fee, the impact from month-prior pricing in a period where prices declined, improved zinc recoveries and lower amortization and reclamation costs partially offset by lower sales, higher interest expense and lower byproduct revenues.

Net revenues for the first quarter totaled CD72.7 million, up from CD60.8 million in the same period of 2006. Noranda makes a portion of its sales based on the average price from the previous month (month-prior pricing). This form of pricing is often used for those customers for whom cash-in-advance terms have been negotiated as a way to manage the fund’s liquidity position and credit exposure.

In a market in which zinc prices are falling, a portion of Noranda’s revenues will benefit from the higher zinc prices from the prior month. In a market where zinc prices are rising, a portion of Noranda’s revenues will lag behind the higher zinc prices. Noranda Income Fund is a hold.